Minimizing Payout Volatility in Longevity Risk-Sharing Pools: An Asset-"Liability" Matching Approach

Abstract

The use of longevity risk-sharing pools in defined contribution plans to provide assured lifetime income in retirement is growing. Unlike insured annuities, risk-sharing pools are not backed by a guarantor and do not subject the sponsor to liabilities or risk reserves. As a result, they offer higher payout rates than annuities. A drawback, however, is that their payouts vary over time in response to the pool's mortality and investment return experience. Many retirees are reliant on their personal savings as a source of income to fund their living expenses. For them, income stability is important and so there is a need to develop methods for minimizing the volatility of their payouts. Furthermore, policymakers in many countries place a high value on post-retirement income stability, and in some places, they even require it. The characteristics of a risk-sharing pool's payouts-the level, growth rate, and volatility-are primarily a function of the investment strategy and the discount rate used to value future payouts. We illustrate how simple asset and liability matching strategies combined with dynamic discount rates can minimize payout volatility while optimizing expected returns.

Keywords: risk pooling, longevity, tontines, asset-liability matching, retirement income, payout volitility

JEL Classification: G22, J26, J32, H55